Tuesday June 24, 2008 - 20:27:40 GMT
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Reuters - www.reuters.com
Forex News - Dollar weakens as housing prices, confidence fall
By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) - The dollar retreated on Tuesday as a plunge in
consumer confidence and declining home prices raised doubts about the
Federal Reserve's ability to hike interest rates to stem inflation.
The dollar struggled as the Fed began a two-day monetary policy
meeting on Tuesday, with analysts expecting the U.S. central bank to
hold interest rates steady at 2 percent. But traders will pore over the
Fed's accompanying statement for clues about possible hikes later in
Analysts said Tuesday's data complicated matters for the Fed as it
tries to prevent the economy from slipping into recession while
grappling with rapidly rising food and energy prices.
"The real domestic data in the U.S. is really bad and this has
pushed the dollar lower ... but still the Fed is stuck because
inflation expectations have risen," said Benedikt Germanier, chief
currency strategist in the U.S. at UBS AG in Stamford, Connecticut.
"The real economy would demand that the Fed cuts interest rates
right now, but it's not that easy especially with rising inflation
pressures, which were caused in part by higher energy prices and a weak
dollar," he added.
The euro earlier hit a session high of $1.5621 after data showed
high prices sapped Americans' confidence in June and pushed
expectations of future prosperity to an all-time low. Meanwhile, the
headline consumer confidence number sank to a 16-year low.
By late afternoon trading, the euro was still up 0.3 percent at
$1.5569. The dollar fell slightly to 107.75 yen from sessions lows at
The dollar fell 0.4 percent to 1.0410 Swiss francs, with the franc benefiting from market talk that Swiss bank UBS (UBSN.VX: Quote, Profile, Research, Stock Buzz) was a takeover target for HSBC (HSBA.L: Quote, Profile, Research, Stock Buzz).
Earlier on Tuesday, the S&P/Case-Shiller house price index
showed prices in 20 major metropolitan areas declined 15.3 percent in
the year to April. Germanier said UBS expects another 10 percent
At the same time, profits at U.S. S&P 500-listed companies were
expected to fall by an average of 10.2 percent in the second quarter,
according to Thomson Reuters data, compared with an earlier estimate of
a 9.6 percent drop.
"Ongoing downward pressure on housing prices and equity markets is
operating to pound household net worth lower in the second quarter of
2008," said Brian Bethune, chief U.S. financial economist at Global
Insight in Lexington, Massachusetts.
He also cites "mounting downside risks to consumer spending in the
second half of 2008 despite the recent report of solid non-auto retail
sales and the anticipated boost from the tax rebates."
Analysts also said the U.S. economy's continued weakness should ease markets' expectations for rate increases this year.
U.S. short-term interest rate futures trimmed the chances of a rate
hike in August to 70 percent from 74 percent after the confidence data,
and analysts said that could slide further if the economy continues to
If the Fed uses more neutral language on the balance of risks
between inflation and growth in its post-meeting policy statement on
Wednesday, dollar losses will accelerate, according to Boris
Schlossberg, senior currency strategist at DailyFX.com in New York.
UBS' Germanier, on the other hand, believes the Fed will "cut back
on its hawkish rhetoric" which should weigh on the dollar's outlook. He
still sees the euro hitting $1.60 against the dollar in one month.
(Additional reporting by Steven C. Johnson; editing by Gary Crosse);
Thomson Reuters journalists are subject to the Editorial Handbook which requires fair presentation and
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